8.3 Corporate Culture, Leadership and Senior Management Responsibilities

Corporate Culture, Leadership and Senior Management Responsibilities

The FCA treats corporate culture as a regulatory concept, not just a management one. The reasoning is straightforward: culture drives conduct, and conduct drives customer outcomes. A firm with a healthy culture is more likely to treat customers fairly, identify and manage risks, and respond to problems quickly. A firm with a toxic culture is more likely to cause the kinds of harms the FCA was created to prevent.

Why the FCA Focuses on Culture

The FCA's focus on culture intensified after the 2012 LIBOR manipulation scandals and subsequent reviews of retail banking conduct. The FCA concluded that detailed rules alone could not prevent misconduct where the underlying culture rewarded it. Since then the FCA has used supervision visits, skilled person reviews (section 166 of FSMA), and thematic work to assess culture. Culture is not directly rule-regulated, but the FCA uses ** Principles 1 (Integrity), 2 (Skill, care and diligence) and 3 (Management and control)**, together with SYSC rules on governance, as the regulatory hooks for assessing culture.

The Senior Managers and Certification Regime (SMCR)

The SMCR is the personal accountability regime for senior staff in FCA-regulated firms. It was extended from banks to all FCA-regulated firms in December 2019. SMCR has three layers.

Senior Managers Regime

Senior Management Functions (SMFs) are the most senior roles, such as CEO, CFO, Chairman, and the executives responsible for key functions like risk, compliance and retail conduct. Each SMF must be approved by the FCA. Each SMF holder has a Statement of Responsibilities describing the areas they are accountable for. The key SMCR idea is that responsibility must sit with a named individual — there must be no gap in accountability.

Certification Regime

The Certification Regime applies to staff whose roles pose a significant risk of harm to the firm or customers — for example, material risk takers, client-facing advisers and certain compliance staff. These Certified Employees are not approved by the FCA; the firm certifies them annually as fit and proper.

Conduct Rules

The Code of Conduct (COCON) sets conduct rules that apply to all SMF holders, certified employees and most other staff. The rules require honesty and integrity, due skill and diligence, openness with the FCA, and proper treatment of customers. Breach of a conduct rule is enforceable against the individual by the FCA with financial penalties.

Tone from the Top

Tone from the top is the FCA's shorthand for the standards set by senior leadership. The FCA expects boards and executive teams to model the behaviours they want staff to display — integrity, customer focus, willingness to challenge, and zero tolerance for rule-bending to meet commercial targets. Where tone from the top is weak, the FCA frequently finds conduct failings further down the organisation. Tone is assessed in supervision through interviews with board members, observation of board meetings, and review of internal communications.

Four Drivers of Culture

The FCA identifies four key drivers of culture that firms and supervisors should pay attention to.

Incentives as a Conduct Risk Driver

Incentives are a particularly common driver of poor conduct. Sales staff paid on volume, with no adjustment for customer outcome, will tend to sell more regardless of suitability. The FCA has fined firms and required remediation where incentive schemes encouraged mis-selling. SYSC 4.1A requires firms to take account of the risks posed by remuneration and incentives.

How Culture Impacts Customer Outcomes

The chain from culture to customer outcome runs: culture → conduct → outcome. A healthy culture supports suitable advice, fair complaints handling and prompt disclosure of issues. A toxic culture supports mis-selling, complaints suppression and concealment of breaches. The FCA uses Consumer Duty outcome data — particularly the price and value and consumer understanding outcomes — to detect culture problems. Where a firm's outcomes data shows consistent harm to a customer group, the FCA will look for the cultural driver.

Consequences of a Toxic Culture

The FCA can take action on three levels where culture fails.

• Firm-level action: financial penalties, public censure, requirements to commission a section 166 skilled person review, variation of permissions, and withdrawal of authorisation in serious cases.
• Individual-level action: SMCR fines against named SMFs, prohibition orders preventing individuals from working in regulated finance, and criminal prosecution where conduct amounts to a criminal offence.
• Senior manager certification: refusal of FCA approval for SMF candidates with a history of poor culture leadership, and revocation of certifications.

The FCA has explicitly stated that lack of personal accountability is itself an aggravating factor in enforcement. Where senior managers knew or should have known of cultural failings and failed to address them, penalties are higher.